Examiner: Celsius Didn’t Deliver From Inception, Used Customer Funds To Prop Up CEL Token

According to an examiner’s investigation into the crypto lender’s operations before its collapse last year, Celsius Network utilized customer funds to offset shortfalls in its obligations to pay stratospheric yields and to prop up the value of its CEL coin while certain firm insiders were cashing out.

Former prosecutor Shoba Pillay has been investigating charges that the crypto lender was misappropriating funds and scamming investors since September. Pillay, a partner at Jenner & Block, has been designated as an independent examiner by US bankruptcy judge Martin Glenn, who is overseeing Celsius’ chapter 11 bankruptcy case.

In the 476-page report, Pillay enumerated, among others, the misleading promises the crypto firm made to its customers and how it failed to deliver since it was founded.

“From its inception, however, Celsius and the driving force behind its operations, Mr. Mashinsky, did not deliver on these promises. Behind the scenes, Celsius conducted its business in a starkly different manner than how it marketed itself to its customers in every key respect,” the report said.

Manipulating the token

According to the report, Celsius had been secretly timing its acquisitions since the middle of March 2020 in order to drastically boost the price of CEL. CEL’s price had “raised by 14,751%” by June 2021.

Celsius’ inner circle profited handsomely from the rising value of their tokens. Despite constantly denying his dumps to the public, CEO and founder Alex Mashinsky is said to have sold at least 25 million CEL tokens worth at least $68.7 million since 2018.

Celsius “often increased the size of its resting orders to buy all of the CEL that [they] were selling” to keep Celsius’ token value consistent during significant sales by early investors. All the while, employees were aware and increasingly asking leadership to adopt right practices.

“We are using users USDC to pay for employees worthless CEL… All because the company is the one inflating the price to get the valuations to be able to sell back to the company,” one employee was quoted as saying in Celsius’ Slack channel.

Celsius then sold client Ethereum and bitcoin to support purchases of the company’s proprietary CEL token because it wasn’t making enough yield from its numerous investing activities to satisfy obligations under its flagship customer offering, the examiner said.

According to the examiner’s report, the rising value of the CEL token allowed Celsius insiders to profit millions of dollars by selling it before the company went bankrupt. Celsius founders Alex Mashinsky and Daniel Leon sold a significant amount of their ownership of the native digital currency, realizing at least $68.7 million and at least $9.7 million, respectively, between 2018 and when Celsius filed for bankruptcy in July.

In 2021, Celsius discovered that it was missing a large amount of bitcoin and ether that it suddenly needed to purchase in order to keep up with customer withdrawals – at a time when the prices of bitcoin and ether were skyrocketing. To make up for the gap, it allegedly chose to utilize client deposits to purchase around $300 million in stablecoins – a band-aid on a leaking ship.

“As a result, Celsius was left with a hole in its balance sheet of stablecoins rather than BTC and ETH,” the report stated. “That hole continued to grow as a result of Celsius’ continued buybacks of CEL and the significant losses Celsius suffered on some of its deployments in 2021.”

“Very Ponzi-like”

A Celsius employee remarked in an internal communication last year that its use of customers’ stablecoins and practice of “growing short in customers coins” was “very Ponzi like,” according to the report.

Pillay previously discovered that Celsius failed to establish adequate accounting and operational controls to guarantee that customer funds in specific bank accounts were appropriately segregated. Celsius “conducted its business in a starkly different manner than how it marketed itself to its customers in every key respect,” according to her latest assessment.

“What Celsius told its customers about its reward rates also did not match what Celsius actually did. Celsius did not distribute up to 80% of its revenues to its customers because it had little to no profits to distribute. Celsius also made no effort to set its reward rates based on its yield,” the report said.

The report also noted that Celsius officials further exacerbated developing liquidity concerns by refusing to drop excessively high incentive rates, shifting to high-risk investments to enhance income, and taking FTX’s own propped-up token as collateral.

Pillay wrote that select Celsius debtors, such as Tether, Alameda Research, and Three Arrows Capital, had limitations that were twice or three times higher than standard. Tether’s exposure reached $2 billion at one time and was labeled a “existential risk” internally.

Celsius was eventually forced to halt customer withdrawals in June in order to prevent bankruptcy. If it had not done so, “new customer deposits would have inevitably become the only liquid source of coins for Celsius to fund withdrawals,” according to examiner’s assessment.

Allegedly, the crypto platform had enough reserves to cover the remaining outstanding withdrawals for the most part, although the company would “directly use new customer deposits to fund customer withdrawal requests” on occasion.

Investigators also discovered about $14 million in unpaid power bills in Celsius Mining, as well as “significant tax compliance deficiencies.” A suspected $23.1 million in use taxes is still owed, and $3.7 million has been set aside for “potential VAT liability.”

Amid all these, Celsius Network recently said that eligible users will be able to withdraw 94% of their qualifying custodial assets at this time.

Earlier this month, New York Attorney General Letitia James filed a civil lawsuit against Mashinsky, saying that the co-founder cheated investors out of billions of dollars in digital currency.

The lawsuit claims that the former CEO misled investors about Celsius’s financial strength and then disguised the lender’s terrible predicament after it lost hundreds of millions of dollars in hazardous transactions. According to the lawsuit, Mashinsky fraudulently claimed that Celsius was safer than a bank and only lent assets to respectable organizations.

“Alex Mashinsky promised to lead investors to financial freedom but led them down a path of financial ruin,” said James. “The law is clear that making false and unsubstantiated promises and misleading investors is illegal.”

This follows after the U.S. Bankruptcy Judge Martin Glenn determined on January 4 that the firm owns the $4.2 billion in crypto deposits in Celsius’s Earn accounts, not the customers. This effectively puts most of the 600,000 accounts at the back of the line for repayment in the crypto lender’s bankruptcy.

Mashinsky resigned from the CEO position in September, pledging to “continue to maintain [his] focus on working to help the community unite behind a plan that will provide the best outcome for all creditors – which is what [he has] been doing since the company filed for bankruptcy.”

A week after, he was found to have withdrawn $10 million worth of cryptocurrency very shortly before putting a halt on customer withdrawals as the company fell towards bankruptcy.

Information for this briefing was found via The Wall Street Journal, Protos, and the sources mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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